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Plugged In

Divorce, Silicon Valley Style

By

Mark Veverka

Updated Sept. 6, 2004 12:01 a.m. ET

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DIVORCES CAN BE UGLY, and the less-than-amicable split among equity partners at Firsthand Capital Management apparently is no different. After working for chief executive and co-founder Kevin Landis for nearly seven years, former marketing director Steven Witt is suing his former boss for, among other things, breach of contract and wrongful firing.

The personal spat between Landis, a technology stockpicker who rose to rock-star status during the bubble, and Witt, a Stanford product and marketing whiz who relentlessly promoted his boss, is compelling in and of itself. But it is Witt's self-portrayal as a whistleblower accusing Landis and the firm of breaking federal regulations that should garner the most attention from mutual-fund investors. The most potentially damaging allegation in the lawsuit -- from a regulatory standpoint -- is Witt's contention that Landis repeatedly misrepresented the firm's research capabilities in contradiction of its own prospectus, and that he lied to the press in attempt to cover up Firsthand's depleted stable of research analysts at the time.

For his part, Landis told Barron's that "none of the claims have any merit." He added: "It's just a long, drawn-out legal process that will show that each of them is baseless." Witt could not be reached for comment, and his attorney declined to comment.

This isn't a happy story, and it certainly isn't clear whose rendition is most accurate. As with most family feuds, the truth probably lies somewhere in the middle.

I've always embraced the idea that Firsthand demonstrated that a couple of smart guys could bootstrap a formidable mutual-fund group from inauspicious beginnings in a San Jose suburb and make it, despite the naysayers on Wall Street. What's more, I wanted to believe that Firsthand had grown and matured into a sophisticated fund manager equal to, or even better than, its more established peers. And to be fair to Landis, the co-founder and CEO, many would say that it has. But to read Witt's complaint and listen to various corroborating allegations by a number of former employees, the naysayers might have been right after all.

First, a little history. Firsthand (then-Interactive Investments) was a technology investment firm started in 1993 by Landis and his former partner, Ken Kam, a medical-technology and life-sciences expert from Hawaii. The first fund, the
Technology Value
Fund, was literally launched from a nondescript house in Milpitas, Calif. before attracting $1.3 million in assets under management in 1996, which was when Witt was hired as marketing director and spokesman. Another executive, Yakoub Bellawala, was also hired as operating manager. Landis and Kam were majority stakeholders, with Witt and Bellawala each getting 5% stakes, according to the lawsuit.

By 1999, riding the crest of the Internet boom, Firsthand had spurted to nearly $200 million in assets. But growing pains emerged. Landis says he was "frustrated" with many operational aspects of the firm, and Kam says that he, too, wanted to take the firm in a different direction. "We had a disagreement, a big disagreement, about how to build our research team," Kam told Barron's in an interview. "It was time to separate."

Thus, Landis bought out Kam just as the fund firm was about to hit its crescendo, and Witt and Bellawala had the option of being bought out as well. How that transpired, however, is far from clear. Contrary to Kam's version of events, Witt asserts that Landis confronted Kam with an ultimatum to accept a "forced" buyout or Landis would quit and start his own advisory firm, taking all of the assets with him, a charge Landis denies. "Nobody put a gun to anybody's head," Landis says.

Kam's departure was a catalyst to a series of events at the heart of Witt's complaint. The former marketing director contends that he was rehired by Landis, but that the CEO misrepresented facts in Witt's buyback deal. In short, Witt asserts that Bellawala, the other equity stakeholder, wasn't forced to sell his stake to Landis after all, contrary to what Witt was told by his boss. The alleged disparity in buyout deals meant that Bellawala could receive tens of millions more than Witt as Firsthand's assets erupted to an all-time high of $8.4 billion by July 2000. After Witt confronted Landis, the CEO verbally agreed to a "new equity deal," according to court filings. Landis agrees. "I subsequently sweetened his deal," he says.

The retail investment dollars poured in because Firsthand and Landis were now on fire. The Firsthand Technology Value Fund had the best five-year record of any fund as of December, 1999, fetching a five-year cumulative return of nearly 900%. Landis was feted for that achievement everywhere, appearing in magazines, including Barron's, newspapers and television. Even Witt would boast that CNBC's audience ratings would spike when Landis would do a "hit" on the cable network. (In addition to being featured and quoted in Barron's, Landis was a participant in our annual Technology Roundtable on more than one occasion).

Despite such meteoric success, all was not rosy back in San Jose, where the fund complex had moved its headquarters in the late 1990s. Whether Witt was duped by Landis or the former marketing chief is suing his former boss for revenge can be decided by the courts, but Witt's contractual squabble could provide potential motive as to why Witt might have blown the whistle on Landis.

As mentioned earlier, Witt contends that Landis repeatedly misled investors to believe that Firsthand's funds were guided by a research analyst team -- even after many analysts were laid off or quit. What's more, Witt asserts that he had to call journalists to correct Landis' misstatements. In addition, Witt contends that Landis ordered some balance-sheet gymnastics that depleted assets on paper so that Landis could get real estate concessions from his landlord after the stock market collapsed. Witt says he was "uncomfortable" covering Landis' serial misstatements, urging him to "take meaningful action to correct inaccurate statements Landis had made on behalf of Firsthand," the suit states.

After confronting his boss about these issues, Witt contends he was fired in April 2003. In addition, his boss stopped making regular buyout payments to him and called in certain promissory notes, according to the suit. Meantime, Landis stated publicly that Witt had quit.

For their part, at least two former Firsthand employees corroborate Witt's account of the research-analyst issue and the real-estate-related balance sheet maneuvers. In fact, these former executives added to Witt's charges, accusing Landis of running an egregiously loose ship when it came to risk management and other compliance issues compared to other mutual-fund advisers. They also accused the CEO of risky cash management and investing too heavily in privately held companies. Landis vehemently denied the accusations. "We have a first-class compliance department here, [and] the funds have been managed properly," he says.

Landis acknowledged some concern about the "research team" accusations, portraying them as potential, unintentional technical violations. "It is something we're looking at," he says. Firsthand passed a routine examination by the Securities and Exchange Commission in 2001. "We've been doubly careful that we have a process that meets the standard of team management," Landis adds. Firsthand currently has only three research analysts on staff.

It remains to be seen whether any of Witt's assertions will trigger any newfound interest on behalf of the SEC. Meantime, attorneys continue to take depositions as the case wends its way through California Superior Court in Santa Clara County. Call it divorce court.

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